The Biggest Baddest Bubble of All

“The Fed is ‘like a wet blanket all over the economy,”’ said David Stockman on The Daily Ticker on Tuesday. “Everything is being micromanaged by them … they will fail and take private enterprise economy down with it.”

The former Reagan budget director, private equity investor and author was busy this week promoting his new book, The Great Deformation: The Corruption of Capitalism in America. In fact, Stockman started off the week with a Sunday New York Times op-ed, which explores many of the themes covered in this newsletter.

It’s quite a lengthy article. Nonetheless, it’s well worth your perusal. You can read it here.

In the meantime, we’ll quote Stockman’s closing statement…

“The United States is broke — fiscally, morally, intellectually — and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest [stock market] bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is.”

Should You Hide Out In Cash?

Up until Stockman’s final sentence, we’d generally agreed with everything he’d said. No doubt, getting out of the stock market right now may be wise. After its lengthy rise it’s bound to go down sometime. But hiding out in cash may ultimately prove to be an even worse peril…like a fish jumping from the frying pan into the fire.

Here at the Economic Prism we believe the Federal Reserve’s gone too far to turn back now. If the stock market were to crack and crash again, the Fed, without fail, would pursue relentless policies of mass money supply inflation. You can count on it.

Who knows if it would reflate the market again? It took four years and $2.5 trillion added to the Fed’s balance sheet to pump the stock market up again after its latest blow up in late 2008. There’s no guarantee it would work again.

What if, for instance, the Fed grossly inflated the money supply and the stock market sagged like a sack full of rotten potatoes? In this instance, Stockman’s advice to hide out in cash would be good…for a while.

But what if the real bubble to pop, the most destructive bubble of all, is a bubble that’s so big and so much in everyone’s face, that hardly a soul recognizes it to be a bubble at all? David Stockman certainly doesn’t recognize it to be a bubble.

The Biggest Baddest Bubble of All

What we are talking about is the 40-year bubble in fiat paper money. Namely, in paper Federal Reserve Notes…commonly referred to as dollars. This is the biggest baddest bubble of all.

The Federal Reserve’s grossly abused its power as sole issuer and emitter of dollars. This abuse of power has become particularly intolerable since fall of 2008. In fact, right now, the Fed’s expanding the money base at a rate of $1 trillion per year. What’s more, they say they’ll continue to do so until the unemployment rate drops below 6.5 percent.

Despite all the Fed’s money creation, prices of goods and services, as measured by the CPI, are only increasing at about 2 percent annually. This modest increase encourages the Fed to print more money. For it appears they can finance Washington’s deficits and subsidize the financial sector without consequences.

Unfortunately, there will be consequences. More and more people are on to the Fed and the high stakes games they are playing. Soon the broad public will lose confidence in the Federal Reserve Notes they are holding. They will come to expect rising prices.

In other words, the demand for dollars will decrease. People will be compelled to not save money; but to spend it. The big bad bubble in fiat dollars will finally burst. That’s when hiding out in cash will result in a rapid and devastating loss of wealth and savings.

Holders of paper money notes will be stuck with something of little value… Fire tinder and toilet paper are the only redeeming qualities that come to mind.